Stocks snap winning streak

MarkCotton

NEW YORK (MarketWatch) -- U.S. stocks ended lower Tuesday, snapping a three-session winning streak, after the latest producer-price report reignited inflation fears, but Johnson & Johnson and Merrill Lynch both outperformed the broader market on the back of strong quarterly results.

A report showing an improvement in builders' sentiment eased concern about the housing market and helped stocks bounce off their lows for the session.

The Dow industrials
DJIA, +0.45%
fell 30.58 points to 11,950.02, but off a session low of 11,887.19.

A 3.3% slide in shares of Intel Corp.
INTC, -0.68%
sparked by a broker downgrade ahead of its quarterly earnings release weighed heavily on the blue-chip index. United Technologies
UTX, +0.18%
Home Depot
HD, -0.54%
andVerizon Communications
VZ, +1.24%
were other notable decliners.

Johnson & Johnson
JNJ, -0.55%
was the biggest percentage gainer on the blue-chip index, up 1.8% at $66.08.

The Nasdaq Composite Index
$COMPQ
was down 18.89 points to 2,344.95, while the S&P 500 Index
SPX, +0.64%
was off 5 points at 1,364.05.

"The bottom line is that this market doesn't want to go down," said Al Kugel, senior investment strategist at Atlantic Trust/Stein Roe, explaining why the major indexes bounced off their session lows. "We've often started the morning lower only to rally in the afternoon. Today we had some nervousness on reports that North Korea may carry out another nuclear test. We also got a confusing producer-price report and a confusing industrial production report."

Once these reports were out of the way, said Kugel, investors refocused on quarterly results and forecasts of double-digit earnings growth.

A positive builders' sentiment report was "probably a factor," that helped the market bounce off its lows, although "we've already had clues that the pace of the decline in the housing market may have reached its peak," Kugel added.

The National Association of Home Builders said U.S. home-builders' sentiment improved marginally in October, a sign the market may be "stabilizing." The NAHB/Wells Fargo housing market index rose 1 point to 31 in October, indicating that about a third of builders are optimistic. The index had fallen for eight months in a row to a 15-year low of 30 in September See full story.

Ahead of the bell, the latest producer-price report reignited concerns about inflation. Core producer prices, which excludes food and energy costs, rose a surprising 0.6% in September, the most since January 2005, as prices for motor vehicles jumped at the fastest rate in more than 15 years. Economists forecasts by MarketWatch had been looking for a rise of only 0.2%. See full story.

For Jeffrey Kleintop, chief investment strategist at PNC Advisors, much of the rise was due to "an increase in auto prices."

"I think it's due to the change in model years but it's certainly not the start of a new trend of rising auto prices."

Kleintop said investors are more worried about the implications of the producer-price report for consumer prices. The September consumer price index is released on Wednesday. Economists polled by MarketWatch are forecasting a 0.3% decline compared with a rise of 0.2% in August. Core consumer prices are expected to have ticked up 0.2%.Check economic calendar.

At the same time, said Kleintop, the producer-price report is also "an excuse to take a little bit of profit" after the recent run of gains, especially in areas like technology that have outperformed.

There was further bad news on the economy for investors to digest. The U.S. industrial sector slowed sharply in September, capping the worst quarter in a year, the Federal Reserve. Industrial production from the nation's factories, mines and utilities dropped 0.6% last month, the biggest decline since the previous September, when Hurricane Katrina disrupted the economy. Economists polled by MarketWatch had been looking for a much smaller decline of 0.1%.

But on a slightly more positive note, the capacity utilization rate for the industrial sector fell to 81.9% from 82.5%, an indication of lessening inflationary pressures from potential bottlenecks. See full story.

On the broader market for equities, decliners outpaced advancers by 5 to 3 on the New York Stock Exchange and by 9 to 5 on the Nasdaq.

Volume was 1.52 billion on the Big Board, and 2.16 billion on the Nasdaq.

Other markets

On the bond market, Treasury prices pared earlier gains to end just slightly higher on the session after the better-than-expected report on builders' sentiment. The 10-year benchmark note rose 1/32 to 100 25/32, with a yield
TNX, +0.63%
of 4.78%. See Bond Report.

The dollar fell, touching a more than one-week low against the yen, after a report showed the U.S. industrial sector slowed more than forecast last month and as traders continued to digest the Russian central bank's recent decision to diversify its foreign-exchange reserves. See Currencies.

Crude futures fell on expectations Wednesday's domestic supply data will show a rise in crude inventories for the latest week. The energy pits are also trying to second-guess the outcome of an emergency meeting of the Organization of the Petroleum Exporting Countries. OPEC members called the meeting to discuss ways to halt the recent slide in oil prices from a high above $77 a barrel in mid-July to below $60 last week. See full story.

Crude for November delivery ended down $1.01 at $58.93 a barrel.

Gold fell, with the front-month contract ending down $5 at $593.50. On Monday, gold for December delivery reached its highest level since early October due to concerns about escalating tensions with North Korea. See Metals Stocks.

Stocks on the move

Intel Corp.
INTC, -0.68%
shares fell after Goldman Sachs downgraded the company to neutral from buy, citing valuation concerns. The broker told clients that while it thinks consensus expectations are too aggressive heading into the quarter, its downgrade is based solely on valuation as the stock has reached its $22 price target.

Goldman said it expects Intel to gain market share and execute on cost reductions in 2007, but believes this is now largely priced into the stock. The broker said it continues to prefer Intel to rival Advanced Micro Devices, Inc
AMD, +1.47%
AMD share were off 3.6% at $24.48.

Merrill Lynch
MER, -1.13%
ended up 41 cents at $84.52. The brokerage reported a more than double increase in net income due to a one-time net benefit of $1.1 billion from its merger with asset-management firm BlackRock. Both the company's net income excluding special items and its revenue beat analysts' expectations.

Johnson & Johnson
JNJ, -0.55%
rose after it posted forecast-beating third-quarter results, with performance spurred by solid growth in all three of its healthcare divisions. See full story.

United Technologies
UTX, +0.18%
fell 2.3% at $65.28 after rising nearly 2.5% over the last five sessions. The diversified industrial group posted a 21% rise in third-quarter net income on strong commercial aerospace industry sales at its Pratt & Whitney and Hamilton Sundstrand units. The company also lifted its earnings forecast for the year.

In a note to clients, J.P. Morgan said the company's growth outlook for 2007 may be dampened somewhat by the performance of its Carrier heating and cooling division. Chief Executive George David said the company "will be looking closely at market developments in Carrier's North American residential and container refrigeration businesses," both of which turned down in the third quarter. See full story.

Hitting the acquisition trail

Shares in the Chicago Mercantile Exchange
CME, +1.44%
rose 2.6% to $516.50 after it reached an agreement to buy the Chicago Board of Trade
BOT, -1.91%
for about $8 billion in stock and cash in a bid to win more of the booming market for derivatives. Chicago Board of Trade share rallied 13% to $151.99.

Eli Lilly & Co.
LLY, +0.56%
said it agreed to acquire Icos Corp.
ICOS
its partner in the production and marketing of erectile-dysfunction drug Cialis, for about $2.1 billion. Eli Lilly's stock fell 11 cents at $57.55, while shares of Icos shot up 16% to $31.44. See full story.

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